For a number years, beginning well before the enactment of the Affordable Care Act, hospitals around the country have been engaged in a land rush. The target has not been real estate, but doctors. The number of physicians employed by organizations associated with hospital systems now exceeds 50 percent and in some specialties like cardiology the figure may be over 75 percent. Much of the post-ACA hiring has involved primary care physicians, a phenomenon explained by the importance of nonspecialists in forming accountable care organizations and serving as the vehicle for referrals in the brave new world of integrated delivery and bundled payment.

The fiscal case for the land rush is not exactly clear, at least in the short run. The median loss for hospitals employing a physician in 2012 was $176,463 and Moody’s considers physician employment “a principal driver of hospitals’ margin pressure.” However, many hospitals, fearful of being left out and losing revenues from referrals, lab work and profitable specialty service lines, are eagerly buying up physician practices. Likewise physicians are also consolidating, especially in the form of large, single-specialty groups.

What have the antitrust enforcers had to say about physician consolidation? Until recently, not much. In fact, neither the FTC or DOJ had ever litigated a physician merger case and only a handful of states had done so. However, in 2012 the FTC signaled its interest in the issue, challenging and settling by consent decree a hospital’s acquisition of two competing cardiology practices in Reno, Nevada. Somewhat controversial was the FTC’s decision not to insist on undoing the acquisitions (which enabled the hospital to employ 88 percent of the cardiologists in the market), but instead only requiring that a number of physicians be released from their non-compete agreements, presumably freeing them to practice independently or affiliate with another hospital.

Of greater significance however is the FTC’s recent victory in federal court in its challenge to an acquisition of a large primary care physician practice in Nampa, Idaho. That case involved the acquisition by St. Luke’s Health System, an integrated delivery system operating eight hospitals in Idaho, of the Saltzer Medical Group, a 41-member group practice, three quarters of which were adult or pediatric primary care physicians (PCPs). Shortly after the merger was announced, two Nampa hospitals, St. Alphonsus and Treasure Valley Hospital, unsuccessfully sought to enjoin the acquisition, claiming irreparable harm to them resulting from reduced admissions and ultimately to consumers because of reduced access to health care services. The court refused to issue a preliminary injunction, noting assurances that St. Luke’s would not take steps that would make divestiture impractical. Next, the FTC, which had been investigating the matter, jumped in and filed its own complaint seeking a permanent injunction unwinding the merger. The court joined the FTC and hospital cases, and conducted an extensive hearing into the matter.

The district court’s decision analyzed the acquisition as a horizontal merger, assessing its effects on primary care physician services in the greater Nampa area. Defendants strongly contested the geographic market contending that Nampa residents could easily obtain services in Boise which is only twenty miles away. Relying heavily on testimony from health plans and internal documents, the court found that few patients would travel even that short distance for primary care services and health plans could not market a network that did not include the physicians acquired by St. Luke’s. Other notable issues decided in plaintiffs’ favor included the existence of entry barriers, the import of health plans to counter market power by tiering, and claimed efficiencies from the consolidation.

Although the court’s finding of a highly localized market is important (the government has lost a number of controversial hospital merger cases in which courts have found markets extending as far as 70 and 100 miles), given the sizeable market shares involved and analyzed as a horizontal merger the ulitmate result was not earthshaking. However at least two issues not addressed by the court are likely to resurface the future.

Most significant is the claim raised by the competing hospitals that when analyzed as a vertical merger, the acquisition violated the Clayton Act. That is, the combination of St. Luke’s and Saltzer foreclosed access to St. Alphonsus and Treasure Valley as St. Luke’s employee-PCPs are unlikely to make referrals to specialty physicians practicing at those hospitals or to admit patients there. The scant case law in the vertical merger area is not terribly friendly to plaintiffs and no cases have addressed physician acquisitions as yet. However given the extensive acquisition activity in highly concentrated hospital and physician markets, plausible cases will certainly present themselves. The St. Alphonsus/Treasure Valley challenge certainly presented a strong case of potential anticompetitive foreclosure and might have sent a needed signal to hospitals acquiring physician practices. However the court did not see the need to decide the issue given its conclusions on the horizontal aspects of the case.

A second issue of interest was the treatment of the hospital’s pricing of physician and ancillary services after the acquisition. Many private insurers follow Medicare’s payment practices and pay higher rates for hospital based services than they do for the same services when provided in a physician’s office or other nonhospital facility. Indeed this quirk in the payment system may be a factor contributing to the boom in physician acquisitions by hospitals. Saltzer physicians performed many ancillary services at their facilities for which St. Luke's would be able to bill at higher "hospital-based" rates after the acquisition —at an estimated cost increase of 30 to 35 percent to Blue Cross of Idaho. However, critics of the court’s opinion have noted that higher private rates are not compelled by regulation. Instead they are the product of negotiation between private health plans and St. Luke’s in which plans have already agreed to pay higher rates under existing contracts. Thus critics claim that the extent to which the PCP acquisitionenables the hospital to exercise market power—the only relevant issue under antitrust merger law—should have been explicitly addressed by the court.

On the issues of what to make of hospital concentration and other consolidation in health care, more to come in a subsequent post.